Minnesota Follows National Trend in 2015 Income Growth

Data from the Census Bureau’s Current Population Survey (CPS) released last week shows strong growth in mean and median household income in the U.S. from 2014 to 2015. Data from the Bureau’s American Community Survey (ACS) confirms this trend, although the rate of growth is somewhat lower than that indicated by CPS data. In addition, ACS data shows that income recovery relative to pre-Great Recession levels has proceeded more quickly in Minnesota than in the rest of the nation.

After adjusting for inflation, national median household income growth from 2014 to 2015 was a robust 3.8 percent, according to the ACS data. While this rate of growth is impressive, it lags behind the 5.2 percent growth rate indicated by CPS data, as reported in part 1 of this series. In fact, over both the short term and the long term, the income growth indicated by the ACS is somewhat lower than that indicated by the CPS. Because of the ACS’s larger sample size, the less optimistic growth figures have a much smaller margin of error and are likely more accurate.

Based on ACS data, Minnesota’s median household income increased by 3.1 percent from 2014 to 2015, modestly less than the national growth rate of 3.8 percent. However, the extent to which 2015 income growth in Minnesota is below the national growth is within Minnesota’s margin of error as reported by the ACS, and thus could conceivably be nothing more than a statistical anomaly. Even if the slower growth in Minnesota’s median income is real, this does not necessarily indicate any fundamental weakness in Minnesota’s economy relative to the rest of the nation; rather, the difference is likely due to the following:

During the Great Recession, median household income in Minnesota declined by $3,800 in constant 2015 dollars,* considerably less than the national decline of $4,800. With a smaller decline, the subsequent recovery is apt to be somewhat smaller in Minnesota.

The growth in median household income in Minnesota from the nadir following the Great Recession began in 2012—one year before the nation as a whole. Thus, Minnesota’s income recovery is more mature than the national recovery, with a smaller potential for recovery-driven growth.

There is a well-established tendency among low-income locations to have higher rates of income growth than high-income locations—a phenomenon known as “income convergence.” As described by economist Louis Johnston in a recent MinnPost article:

… research has shown time and again that states which start out with low levels of income per person grow faster than states that begin with higher levels of income per person… A clear implication of income convergence is that high-income states, like Minnesota, tend to have below-average growth rates. That is, high income states don’t run away from the pack; instead, through movements of people, capital, and ideas, low income states catch up to the high income states by growing faster — but not forever.

Over the longer term, median household income in Minnesota has outperformed the national average. From 2007—on the eve of the Great Recession—to 2015, Minnesota’s median household income has declined by just under $300 in constant 2015 dollars, based on ACS data. Meanwhile, the national median has declined by just over $2,200. With one more year of marginal real income growth, median household income in Minnesota will surpass pre-recession levels; this is not the case with the national median. The extent to which median household income in Minnesota is above the U.S. median has increased by nearly $2,000 from 2007 to 2015.

Even after factoring in the margin of error in these ACS figures, it is clear that the income gap between Minnesota and the rest of the nation has increased since 2007. Thus, over the longer time frame spanning the Great Recession and subsequent recovery, Minnesota has bucked the tendency toward income convergence described by Professor Johnston. The extent to which Minnesota’s income growth lagged behind the national average from 2014 to 2015 is modest and within the ACS’s margin of error, and certainly does not warrant any hyper-ventilation regarding the state of Minnesota’s economy.

The new 2015 Census data also reveals that most minority groups in Minnesota had particularly strong income growth in 2015, although this finding masks a longer term trend of below average income growth among Minnesota minorities. More on this in part three of this series.

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